July 20, 2018 / 4:31 AM / 3 months ago

GLOBAL MARKETS-Chinese yuan slides, spooking Asian stocks, as trade war fears heighten

* MSCI Asia-Pacific index choppy, Hang Seng down over 0.5 pct

* China state banks seen buying yuan after its fall to 1-yr low

* Dollar sags after Trump shows displeasure towards Fed’s hikes

By Shinichi Saoshiro and Hideyuki Sano

TOKYO, July 20 (Reuters) - The Chinese yuan skidded to one-year lows on Friday, shaking up Asian share markets and stoking concerns Beijing’s currency management could become the next flash point in a fierce trade dispute with the United States.

As the yuan fell to as low as 6.8128 to the dollar, major state-owned Chinese banks were seen selling dollars in an apparent bid by authorities to prevent a rapid fall in the currency.

Most equity markets in the region were spooked by the yuan’s continued slide. MSCI’s broadest index of Asia-Pacific shares outside Japan was off 0.05 percent in volatile trade.

“There are several channels through which the yuan’s weakening is hitting Asian stocks. First, a weaker yuan challenges the competitiveness of other Asian economies,” said Shusuke Yamada, currency and equity strategist at Bank of America Merrill Lynch in Tokyo.

“The weaker currency also causes fears of capital leaving China and disrupting their capital markets, which could have knock-on effects on Asia. Lastly, a weaker yuan deepens trade war concerns.”

The Chinese currency fell to as low as 6.8128 to the dollar, its weakest level in more than a year, before paring some of losses to 6.7941 on yuan buying by the major state-owned Chinese banks.

Traders said the amount of dollar selling was not huge, and appeared to be aimed at controlling the pace of depreciation of the yuan, which has been battered over the past several weeks by the heated Sino-U.S. trade dispute.

Global markets are sensitive to any sharp moves in the yuan. China’s unexpected devaluation of the yuan in 2015 and the subsequent sharp sell-off of the currency spread turmoil in global financial markets as investors worried about the stability of the world’s second-largest economy.

Asian stock markets were already edgy after Wall Street shares declined overnight amid the latest flare up in trade tensions, with the Dow shedding 0.53 percent and the S&P 500 declining 0.39 percent.

Japan’s Nikkei lost 0.63 percent while Hong Kong’s Hang Seng slipped 0.57 percent. In mainland China, the Shanghai Composite Index was down 0.12 percent.

Worries about a full-blown global trade war are likely to persist as officials from the EU Trade Commission, due to arrive in Washington next week for trade talks, are said to be preparing a list of tit-for-tat actions in response to proposed U.S. tariffs on EU cars.

In currencies, the dollar was on the defensive following U.S. President Donald Trump’s criticism of Federal Reserve policy.

Trump on Thursday criticised Fed policy and expressed concern about the potential impact of rising rates and a stronger dollar on the U.S. economy and American corporate competitiveness.

The dollar index against a basket of six major currencies stood little changed at 95.114 after being knocked down from 95.652, its highest level since July 2017.

The dollar had reached that high after Federal Reserve Chairman Jerome Powell expressed confidence in the U.S. economy and affirmed expectations that the central bank was on track to keep hiking interest rates gradually.

The euro was flat at $1.1650, lifted from a three-week trough of $1.1575 set overnight. The single currency has lost about 0.3 percent this week.

The greenback was unchanged at 112.46 yen. It has been knocked away from one-year peak of 113.18 scaled on Thursday.

Brent crude futures stood flat at $72.59 a barrel, maintaining their gains so far this week, after Saudi Arabia’s OPEC governor said the kingdom’s exports are likely to fall next month. (Editing by Sam Holmes & Shri Navaratnam)

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